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Must-Read: If another significant contractionary macroeconomic shock were to hit in the next two years, we would be totally s—-ed. The Fed doesn’t have enough maneuvering room, and only an idiot would think that this President and this Congress would step up and do the job. It is vitally important that the Red now be taking steps so that we would not be totally s—ed if significant contractionary macroeconomic shock were to hit in years three to five. But for that to be the case her colleagues would have to listen to Lael. And there is no sign that they are willing to do so:

…Despite the Fed governor’s persuasive attempt, she’ll find it harder to push the Fed in a more dovish direction than she did at the end of 2015…. The primary issue… is that wage growth has remained subdued and price inflation has trended down…. For too long the Fed persisted in thinking that the inflation slowdown was caused by idiosyncratic factors. One of Brainard’s points is that this belief is increasingly hard to justify…. As to the implications for monetary policy, she writes….

Some might determine that preemptive tightening is appropriate…. However… the Phillips curve appears to be flatter today…. It could take a considerable undershooting of the natural rate of unemployment to achieve our inflation objective if we were to rely on resource utilization alone…. To the extent that the neutral rate remains low relative to its historical value, there is a high premium on guiding inflation back up to target so as to retain space to buffer adverse shocks with conventional policy…. It is important to be clear that we would be comfortable with inflation moving modestly above our target for a time….